LPI’s 1QFY24 results beat expectations as net claims appeared lower following reversal of past claims provisions, prompting us to raise our FY24F-FY25F earnings by 13%-4%. We see that there could be more intensive competition especially in the fire class insurance segment, but are not overly deterred by LPI’s position, thanks to their backing from a leading bank. We maintain OUTPERFORM call but raise our TP to RM15.00 (from RM14.70) as we roll over our valuations.

1QFY24 beat expectations. LPI’s 1QFY24 net profit hit 30% of both our full-year forecast and consensus full-year estimate. We find positive deviations in significantly better net claims (mainly attributed by the fire class segment) from higher reversed claims reserves during the period.

YoY, 1QFY24 insurance service revenue came in flattish, underpinned by weakness in its fire class insurance products (-19%). On the flipside, its motor (+11%) and miscellaneous (+12%) products provided support, likely on the back on more policies demanded. That said, insurance service results surged by 44% as net incurred claims were significantly lower at 40.1% (-11.7ppts) with claims provisions being reversed. We opine this could be tied to previous frontloaded reserves owing to unprecedented flooding incidences in prior years. This overall translated to greater net profit of RM101.3m (+37%) following higher effective taxes (20.5%, +1.3ppts).

QoQ, 1QFY24 revenue declined by 8% following the same pressures from the fire class insurance segment but with insurance results also coming in better (+8%) on the back of a higher policy retention (77.6%, +19.7ppts). On the flipside, investment income nearly doubled, thanks to dividend payments from the group’s equity investments. All in, 1QFY24 net profit came in 29% stronger.

Outlook. LPI appears to be feeling the pinch with industry detariffication looking to level the competition in the fire class insurance segment. That said, we believe that the group will maintain a leading position in the market thanks to its close affiliation to PBBANK with mortgage demand expected to stay supportive. In the meantime, the group will likely continue expanding its agency force and bancassurance network for a more direct outreach to customers. Although the claims ratio might see a decline as overall activities normalize, reinsurance coverages could be reviewed as climate conditions worsen, raising risks tied to certain policies.

Forecast. Post results, we raise our FY24F-FY25F earnings by 13%-4% as we lower our net claims ratio to account for further possible reversal of claims reserves in fire class products.

Maintain OUTPERFORM with a higher TP of RM15.00 (from RM14.70). We raise our TP as we roll over our valuation base year to FY25F on an unchanged 2.6x PBV. This represents a 25% premium against the industry average of 2.1x which we believe is fair given: (i) better net margins of 17% (vs peer’s 11%), and (ii) higher dividend returns of 6%-7% (vs peer’s 4%-5%). LPI’s premium valuation may also be supported by its long-term viability from its affiliation with Public Bank. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Risks to our call include: (i) lower premium underwritten, (ii) higher- than-expected claims, and (iii) higher-than-expected management expense ratio.

Source: Kenanga Research - 30 Apr 2024